Chapter Unemployment 15

Identifying Unemployment How is unemployment measured? Employed – People who work Unemployed – Not employed Want to work Looking for a job Not in the labor force – Not employed – Not unemployed 2

Figure The breakdown of the population in The Bureau of Labor Statistics divides the adult population into three categories: employed, unemployed, and not in the labor force.

Identifying Unemployment How is unemployment measured? Labor force – Total number of workers Employed Unemployed Labor force = Number of employed + Number of unemployed 4

Identifying Unemployment How is unemployment measured? Unemployment rate – Percentage of labor force that is unemployed Labor-force participation rate – Percentage of adult population that is in the labor force 5

Table The labor-market experiences of various demographic groups 1 6 Demographic GroupUnemployment RateLabor-force Participation Rate Adults (ages 20 and older) White, male White, female Black, male Black, female Teenagers (ages 16–19) White, male White, female Black, male Black, female 3.7% % This table shows the unemployment rate and the labor-force participation rate of various groups in the U.S. population for 2007

Figure Unemployment rate since This graph uses annual data on the U.S. unemployment rate to show the percentage of the labor force without a job. The natural rate of unemployment is the normal level of unemployment around which the unemployment rate fluctuates

Identifying Unemployment Natural rate of unemployment – Normal rate of unemployment – Around which the unemployment rate fluctuates Cyclical unemployment – Deviation of unemployment from its natural rate 8

Figure Labor-force participation rates for men and women since This figure shows the percentage of adult men and women who are members of the labor force. It shows that over the past several decades, women have entered the labor force, and men have left it.

Identifying Unemployment Does the unemployment rate measure what we want it to? Official unemployment rate – Useful – Imperfect measure of joblessness Movements into and out of the labor force – Common – More than one-third of unemployed Recent entrants into the labor force 10

Identifying Unemployment Does the unemployment rate…? – Not all unemployment ends with the job seeker finding a job Half of all spells of unemployment – End when the unemployed leaves the labor force Some of those who report being unemployed – May not be trying hard to find a job Want to qualify for a government help Working but paid “under the table” 11

Identifying Unemployment Does the unemployment rate…? Some of those who are out of labor force – May want to work Discouraged workers – Individuals who would like to work – Have given up looking for a job 12

Identifying Unemployment How long are the unemployed without work? – Most spells of unemployment are short – Most unemployment observed at any given time is long-term – Most people who become unemployed Will soon find jobs – Most of the economy’s unemployment problem Attributable to the relatively few workers who are jobless for long periods of time 13

Identifying Unemployment Why are there always some people unemployed? Unemployment rate – Never falls to zero – Fluctuates around the natural rate of unemployment Frictional unemployment – Results because it takes time for workers to search for the jobs That best suit their tastes and skills 14

Identifying Unemployment Why are there always some people unemployed? Structural unemployment – Results because the number of jobs available in some labor markets Is insufficient to provide a job for everyone who wants one 15

Job Search Job search Process by which workers find appropriate jobs given their tastes and skills Frictional unemployment Results from the process of matching workers and jobs Why some frictional unemployment is inevitable Changes in demand for labor among different firms Changes in composition of demand among industries or regions (sectoral shifts) 16

Job Search Unemployment insurance – Government program – Partially protects workers’ incomes When they become unemployed – Increases frictional unemployment Without intending to do so 17

Minimum-Wage Laws Structural unemployment – Results when the number of jobs is insufficient for the number of workers Minimum-wage laws – Can cause unemployment – Forces the wage to remain above the equilibrium level Higher quantity of labor supplied Smaller quantity of labor demanded Surplus of labor – unemployment 18

Figure Unemployment from a wage above equilibrium level 4 19 In this labor market, the wage at which supply and demand balance is W E. At this equilibrium wage, the quantity of labor supplied and the quantity of labor demanded both equal L E. By contrast, if the wage is forced to remain above the equilibrium level, perhaps because of a minimum-wage law, the quantity of labor supplied rises to L S, and the quantity of labor demanded falls to L D. The resulting surplus of labor, L S – L D, represents unemployment. Wage Quantity of Labor 0 Minimum wage LDLD LSLS Surplus of labor = Unemployment Labor demand Labor supply LELE WEWE

Minimum-Wage Laws Wages may be kept above equilibrium level – Minimum-wage laws – Unions – Efficiency wages If the wage - kept above the equilibrium level – Result: unemployment 20

Unions and Collective Bargaining Union – Worker association – Bargains with employers over Wages, benefits, and working conditions The economics of unions – Collective bargaining Process: unions and firms agree on the terms of employment – Strike Organized withdrawal of labor from a firm by a union 21

Unions and Collective Bargaining The economics of unions Union - raises the wage above the equilibrium level – Higher quantity of labor supplied – Smaller quantity of labor demanded – Unemployment – Better off: employed workers (insiders) – Worse off: unemployed (outsiders) May stay unemployed Take jobs in firms that are not unionized 22

Unions and Collective Bargaining The economics of unions Union - raises the wage above equilibrium – Supply of labor – increase in industries not unionized Lower wage Workers in unions – Reap the benefit of collective bargaining Workers not in unions – Bear some of the cost 23

Unions and Collective Bargaining Are unions good or bad for the economy? Critics – Unions - a type of cartel – Allocation of labor Inefficient – High union wages reduce employment in unionized firms below the efficient level Inequitable – Some workers benefit at the expense of other workers 24

Unions and Collective Bargaining Are unions good or bad for the economy? Advocates – Unions - necessary antidote to the market power of the firms that hire workers In the absence of a union – Firm - pay lower wages and offer worse working conditions – Unions - help firms respond efficiently to workers’ concerns Keep a happy and productive workforce 25

The Theory of Efficiency Wages Efficiency wages – Above-equilibrium wages paid by firms to increase worker productivity Worker health – Better paid workers Eat a more nutritious diet – Healthier and more productive Worker turnover – Firm - can reduce turnover among its workers By paying them a high wage 26

The Theory of Efficiency Wages Worker quality – Firm – pays a high wage Attracts a better pool of workers Increases the quality of its workforce Worker effort – High wages – make workers more eager to keep their jobs Give workers an incentive to put forward their best effort 27